## Inventory and Purchase Budget - Part 4

Part 4   -  Determine Your Accounts Payable on Purchases

An Account Payable on Purchases is a short-term liability a company incurs when it purchases inventory (products) on credit. In essence, accounts payable on purchases refer to the amount of money a company owes its supplier(s) for product/inventory. Your task is to forecast the amount of money your company will owe  supplier(s) at the end of each forecasted period (IE at the end of each forecasted business year). In our example, Murray's task is to forecast the amount of money he will owe his supplier on December 31, 200X and on December 31, 200Y (IE the end of each forecasted period or business year). The following formula is used to determine a company's forecasted ending balance in its Accounts Payable on Purchases.

 Calculation of Ending Accounts Payable on Purchases Purchases to be Made during the current year \$XXX Less: Payments to be made during the current year \$(XXX) Add: Payment to be made in current year on previous years' Account Payable \$ XXX Amount Owed to Your Supplier (accounts payable on purchases) \$ XXX

Lets now calculate Murray's Forecasted Accounts Payable on Purchases for December 31, 200X. As the formula implies, we need three pieces of information - Murray's total forecasted purchases for 200X, his total forecasted payment on purchases during 200X, and the amount he owed his supplier at the end of 200W. The first two pieces of information have already been calculated in Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases". Below summarizes these calculations.

 PAYMENT ON PURCHASESMADE DURING 200X: MONTH Number of Units to be Purchased Cost to Purchase each Unit Total Cost of Purchases each Month Payment on Purchases each Month July 200X 1,548 \$3.00 \$4,644 \$ 0 August 956 \$3.00 \$2,868 \$4,644 September 564 \$3.00 \$1,692 \$2,868 October 412 \$3.00 \$1,236 \$1,692 November 472 \$3.00 \$1,416 \$1,236 December 912 \$3.00 \$2,736 \$1,416 TOTALS 4,864 \$14,592 \$11,856

As you can see, Murray's Total Forecasted Purchases for 200X is expected to be \$14,592. In addition, Murray's Total Forecasted Payment on his Purchases during 200X is expected to be \$11,856. Once again, these numbers were taking from Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases".

The final piece of information required to determine Murray's Accounts Payable on Purchases is the amount he owed his supplier at the end of 200W. Since Murray's first month of operation is scheduled for July of 200X, he would not have purchased any inventory in 200W and therefore, he would not have owed his supplier any money at the end of 200W.

Now Murray can use the formula to calculate his forecasted Accounts Payable on Purchases for December 31, 200X.

 Accounts Payable on Purchasesas of December 31, 200X: Purchases to be made during the year \$14,592 Less: Payments made during the Year \$11,856 Add: Payment for December 200W Accounts Payable \$ 0.00 Accounts Payable on Purchases as of Dec. 31, 200X \$ 2,736

As you can see, on December 31, 200X, Murray will owe his supplier of diskettes \$2,736 ( IE Accounts Payable on Purchases). The Accounts Payable on Purchases (\$2,736) will appear on Murray's December 31, 200X Forecasted Balance Sheet under the Current Liabilities section.

Lets now calculate Murray's accounts payable on purchases for December 31, 200Y. Once again, we need three pieces of information - Murray's total forecasted purchases for 200Y, his total forecasted payment on purchases during 200Y, and the amount he anticipates to owe his supplier at the end of his 200X. The first two pieces of information have already been calculated in Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases". Below summarizes these calculations.

 PAYMENT ON PURCHASESMADE DURING 200Y: MONTH Number of Units to be Purchased Cost to Purchase each Product Total Cost of Purchases each Month Payment on Purchases each Month January 200Y 888 \$3.30 \$2,930 \$2,736 February 736 \$3.30 \$2,429 \$2,930 March 720 \$3.30 \$2,376 \$2,429 April 576 \$3.30 \$1,901 \$2,376 May 416 \$3.30 \$1,373 \$1,901 June 328 \$3.30 \$1,082 \$1,373 July 680 \$3.30 \$2,244 \$1,082 August 648 \$3.30 \$2,138 \$2,244 September 424 \$3.30 \$1,399 \$2,138 October 832 \$3.30 \$2,746 \$1,399 November 808 \$3.30 \$2,666 \$2,746 December 1160 \$3.30 \$3,828 \$2,666 TOTALS 8,216 \$27,113 \$26,021

As you can see, Murray's Total Forecasted Purchases for 200Y is expected to be \$27,113. In addition, Murray's Total Forecasted Payment on Purchases during 200Y is expected to be \$26,021. Once again, these numbers were taking from Part 3 of this Budget entitled, "Determining When You Will Pay For Your Monthly Purchases".

The final piece of information required to determine Murray's Ending Accounts Payable on Purchases is the amount he anticipates to owe his supplier at the end of 200X (IE Account Payable on Purchases as of December 31, 200X). Recall from above, Murray calculated this amount to be \$2,736.

Murray can now use the formula to calculate his Forecasted Accounts Payable on Purchases for December 31, 200Y.

 Accounts Payable on Purchasesas of December 31, 200Y: Purchases to be Made during the year \$27,113 Less: Payments made during the Year \$26,021 Add: Payment on December 31, 200X Accounts Payable \$ 2,736 Accounts Payable on Purchases as of Dec. 31, 200Y \$ 3,828

As you can see, on December 31, 200Y, Murray will owe his supplier of diskettes \$3,828 (IE Accounts Payable on Purchases). The Accounts Payable on Purchases (\$3,828) will appear on Murray's December 31, 200Y Forecasted Balance Sheet under the Current Liabilities section.

Categories: Forecasting